Financial Reform Rape: Don’t Ask, Don’t Tell

There is a bill that has cleared the House of Representatives and is now being debated in the Senate. This bill, sponsored by Senate Banking Committee Chairman Christopher Dodd, labeled a “Financial Reform Bill” , which according to President Obama, will clear corruption from Wall Street and large insurance firms, investment firms and banking institutions. Obama’s own words:

“These are reforms that would put an end to taxpayer bailouts; that would bring complex financial dealings out of the shadows; that would protect consumers; and that would give shareholders more power in the financial system.”

Well, that all sounds good. But what does all this really mean? What in basic terms is really going on here? Will this “Financial Reform” just mean more ongoing bailouts from the taxpayers, but just with a different name? Or will we finally see just desserts for those who greedily bled us to this crisis to begin with?

The first page of the Bill states it’s overall intentions:

“… to provide for effective bank supervision through the establishment

of the Financial Institutions Regulatory Administration, to enhance

the regulation of consumer financial products and services through the

establishment of the Consumer Financial Protection Agency, to allow

the Federal government to better coordinate and monitor insurance matters

So basically, this bill sets a course for 3 new federal agencies – all of whom have the job of basically investigating mortgage loans, investments, banking transactions, stock trading – amongst a litany of other fiduciary transactions.

The main point of the bill allows the three agencies better access to information about large market participants whose failure may have a negative effect on our entire financial system. The hope in such micromanagement would be to prevent a financial institution deemed “too big to fail” from making unethical and unwise financial decisions before they culminate in “needing a bailout”, in very general terms.

This on it’s face doesn’t seem too bad. The last thing tax payers want is to subsidize another “too-big” bank bailout. But the bill goes one step farther.

According to the Christian Science Monitor, “The bill would establish a liquidation fund financed by the industry and authorize the appointment of FDIC as receiver for insolvent companies, with SIPC acting as trustee for broker-dealers…..The government is to take over not only defaulting financial companies but those “in danger of default”. Five conditions are listed to define default and in-danger-of-default. Two are straightforward—the company will be filing for bankruptcy shortly or its board or shareholders agree to a government takeover.

The other three conditions allow the government to take over even when a company is not filing for bankruptcy and its board/shareholders do not consent. What it means is that the secretary of the Treasury can decide that a company is about to collapse even if it does not look that way to other people.”

So, in plain terms, it would give the Secretary of the Treasury the right to take over an institution if they “thought it looked” like it might fail – even if no one else thinks so.

There are “oversights” in the bill for this power. The Treasury has to get the OK of a panel consisting of several bankruptcy judges. The FDIC and the Federal Reserve also have a say. One can only hope these judges, the FDIC and the Fed all have ethics enough not to play politics with private enterprise institutions – and that’s a huge bet when it comes to big government.

I think the most interesting (or disturbing) thing I read about this proposed legislation came from Senator Dodd himself, “This legislation will not stop the next crisis from coming. No legislation can…” Read for yourself at the HuffPo.

Really Senator?

His statement begs the question, If this legislation, in fact no legislation, can ever stop the next crisis from coming, then why are we even discussing this legislation? Why are we building three new federal agencies with the potential to essentially confiscate and dissolve private enterprise in the name of “heading off a crisis”? These agencies headed by individuals are appointed by the POTUS and confirmed by the Senate. The agencies have unlimited funding by the Fed, and what’s more, the Fed cannot deny their funding per the Bill (in the Bill’s current form).

I must assume then, per Sen. Dodd’s statements, that this Bill is not more than a blatant governmental power grab over private free enterprise. Much like the healthcare bill – most Americans do agree that we need some genuinely better oversight of our financial institutions, but once again the government appears to be using Americans’ own good intentions, and twisting them into thicket overweening bureaucracy of governmental control doing anything but the first stated intent.

Ok, so what’s a real solution? I went in search of that as well…

Per Karl Denninger, there is a 17 page bill, repealed by Bill Clinton in 1999, called the Glass –Steagall bill, which essentially forbade financial institutions from getting “too big to fail” in the first place.

“Re-impose Glass-Steagall. 17 pages of legislation that kept the system safe and sound for FIFTY YEARS.

We started dismantling it in the 1980s by circumventions and outright unlawful acts including Alan Greenspan granting an illegal waiver to legitimate an illegal merger.

This culminated in Gramm-Leach-Bliley and the Commodities Futures Modernization Act – the latter overruling anti-bucket-shop laws put in place to prevent the precise same acts that caused the meltdown in 1929. As one would expect, we got the same result we had in the 1920s. “

Denninger’s article parses President Obama’s April 22, 2010 speech to Wall Street, and gives a Stock Trader’s perspective on what caused these meltdowns in the first place.

Seventeen pages sounds a lot easier fix than 1300+ pages that by it’s own author will admittedly not prevent any further meltdowns.

So there you have it: The opinions of both the author of the bill, and a former CEO and current trader in the market.

A bill that won’t work, and a bill that did work. More bureaucracy , more government intervention, or a 17 page guard rail to stop the corruption, in the simplest of terms.